For insurance-linked securities and reinsurance-linked investment manager Twelve Capital, while 2023 has been one other 12 months of above average global insured catastrophe losses, the managers ILS and catastrophe bond fund strategies have been largely insulated from impacts.
Like many ILS managers have done, Twelve Capital adopted a concentrate on the foremost peak perils and shifted away from many reinsurance and retrocession arrangements that included frequency exposure and lower-layer risks lately.
The shift towards the true peak perils, largely on an occurrence basis, has helped to insulate ILS managers from what has been one other costly 12 months of severe weather and catastrophe losses for the worldwide insurance and reinsurance industry.
Global catastrophe losses were already above $100 billion for the 12 months around the start of November, the sixth 12 months since 2017 they’ve done so and the fourth 12 months in a row.
In a post-hurricane season update, Twelve Capital noted that the contribution from so-called secondary perils has again been high.
The article linked above suggests greater than three-quarters of worldwide insured catastrophe losses in 2023 have been from peak perils, with US convective storms the most important peril contributor to the annual loss total.
Twelve Capital commented that, “Despite one other 12 months of great industry losses across the globe, the approach at Twelve Capital to concentrate on covering well modelled and clearly defined peak perils has resulted in minimal impact on its portfolios.”
Occurring to notice that, “With U.S. convective storms causing over USD 50bn price of insured losses, it was actually a test to the Cat Bond market to know how these losses would impact investors. Aggregate erosions of transactions covering convective storms were actually impacted, but on the time of writing, the present impact to the market is anticipated to be minor, with the impact to Twelve Capital’s positions specifically expected to be even lower than the market, given our “Peak- Peril” approach.”
Referring to other non-peak perils or regions, Twelve Capital said, “There have been also minor impacts to aggregate erosions from Winter Storm Elliot (December 2022) and the Turkey Earthquake (February 2023), but these impacts were along with losses already driven from Hurricane Ian in 2022, and didn’t cause any impact on a stand-alone basis.”
Then, specifically on the hurricane season, Twelve Capital also said, “The most recent available data on Hurricane Otis indicates to an expected 50% payout on the FONDEN IBRD Class D Notes, which use a parametric trigger based on central pressure estimates. This bond constitutes a minimal position in our portfolios, and as such a payout from this transaction is not going to have material impact on performance.”
That is the experience of many within the ILS manager community, that the shift up reinsurance and retro towers, in addition to further away from frequency and attritional severe weather losses, has helped to insulate ILS fund portfolios against the still-high industry loss experience this 12 months and alongside rates is driving strong performance, for this reason.
In fact, hurricane Idalia could have modified all of this, had the category 4 storm made landfall further south along the Florida Gulf coast.
But even in the vast majority of more severe scenarios for hurricane Idalia, the adjustments made to ILS fund portfolios would likely have made that more of a manageable loss event, one that would even have still been absorbed by annual ILS fund performance, moderately than wipe it out.
In 2023, the ILS fund manager community has demonstrated the strengthening of their portfolio strategies, especially against secondary perils and frequency severe weather loss events.
We didn’t see a big hurricane, typhoon, or earthquake loss event test this 12 months, but it surely is obvious that ILS portfolios are generally rather more hardened against even probably the most severe of catastrophe events.